New 'Nike Flash' Campaign Is a Bigger Deal Than Financial Media Thinks

Quick Takeaway from Hedgeye's Brian McGough:

This new Nike Flash campaign is a bigger deal than the financial press will give it credit for. It's geared largely toward running, and as shown in the pictures below, the product literally glows when under a light (most notably -- a car's headlights for people who run early morning and at night). The jacket shown below retails for just under $500, and the shoes between $100-$150.

Most notable here is that the old way of doing things at Nike is that the company would come out with a shoe, or a shirt, and they would literally have nothing to do with one another -- and that's because the footwear and apparel organizations did not come out of their silos. But now the product is integrated in design, manufacturing, logistics, and presentation at retail.

This collection will only be available at Nike online and Nike retail stores. Sorry, Foot Locker.

Takeaway: Let's not forget that Dillard's attempted to structure a public REIT in 2011, but never got it done. The market's appetite for anything other than primo mall properties is simply not there. Sears talks about 200-300 locations, but Sears only has 130 'A' Mall locations. The property location is critical here -- more so than with other transactions. Dillard's at least will likely remain a viable entity for a fairly long time. Sears, however, has a 95% likelihood of being wiped clean from the retail landscape within five years -- and 60% chance within 3-years, in our opinion. We can come up with a list of retailers/restaurants who would want a piece of the 'A' Mall properties Sears owns when it goes away, but at best we can identify a home for a third of the real estate SHLD owns. Overall, this transaction seems unlikely to us -- unless financial terms are egregiously skewed in favor of investors.

NKE - Flash Collection

Takeaway: This new Nike Flash campaign is a bigger deal than the financial press will give it credit for. It's geared largely toward running and as shown in the pictures below, the product literally glows when under a light (most notably -- a car's headlights for people who run early morning and at night). The jacket shown below retails for just under $500, and the shoes between $100-$150. Most notable here is that the old way of doing things at Nike is that the company would come out with a shoe, or a shirt, and they would literally have nothing to do with one another -- and that's because the footwear and apparel organizations did not come out of their silos. But now the product is integrated in design, manufacturing, logistics, and presentation at retail. This collection will only be available at Nike online and Nike retail stores. Sorry, Foot Locker.

"In a rare show of unity, industry bodies that represent banks are banding together to urge lawmakers to introduce legislation that would force retailers to pay for the clean-up themselves during the new session of Congress next year."

"The data breach at the retailer, which the company reported in September, cost community banks and credit unions at least $160m to reissue cards and pay for other services related to the attack. Home Depot estimated that the breach cost the company at least $62m."

Takeaway: This isn't applicable to the breaches at TGT and HD, but it's the driving force behind banks pushing for a change in legislation. The biggest breach in history at TJX in 2007 compromised nearly 100mm cards and cost the retailer $256mm. TGT's stats look like this - 40mm cards compromised at an estimated cost of $129mm. We have to assume that banks are eating 2 to 3 times that amount. It makes sense to us that Retailers could and probably should be left holding the bag when their internal systems fail.

"The Persian Gulf’s first Macy’s Inc. department store will be part of a $1 billion Abu Dhabi mall planned by Gulf Capital and Stephen Ross’s Related Cos."

"The Al Maryah Central mall will connect with an existing luxury shopping center called the Galleria on Al Maryah Island. The mall will have 2.3 million square feet of space and the project includes a tower containing a 200-room hotel and another with about 300 serviced apartments…"

Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.

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1. CFTC Net Futures and Options Positioning CRB Index:The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.

The SILVER, WHEAT, AND SOYBEANS markets experienced the most BULLISH relative positioning change in the CRB week-over-week

The SUGAR, GOLD, AND COPPER markets experienced the most BEARISH relative positioning change in the CRB week-over-week

The CORN, SUGAR, AND ORANGE JUICE markets are positioned for HIGHER PRICES in 1-year

The LEAN HOGS, NATURAL GAS, AND LIVE CATTLE markets are positioned for LOWER PRICES in 1-year

4. Open Interest:Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.

Ben Ryan

Analyst

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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

European Banking Monitor: Spanish Risk Premiums Continue Higher

European Financial CDS - Swaps mostly tightened in Europe last week though were little changed on balance. In fact, on both a w/w and m/m basis EU bank swaps show little change at the moment. The stocks have been a bit more volatile as the average (and median) stock price change was down 3% for the week.

Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 11 bps.

Matthew Hedrick

Associate

Ben Ryan

Analyst

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11/10/14 09:56 AM EST

Macro Notebook 11/10: Japan | UST10YR | Divergences

Hedgeye Research Director Daryl Jones shares the top three things in Keith's macro notebook this morning.

COMPANY NEWS

LVS/GENTING – Singapore Casinos Impacted by VIP Fall – Sheldon Adelson has accused Genting's RWS of relying on overly generous incentives and credit to entice big money players. Around half of that VIP business comes from customers from China, which is in the midst of an economic slowdown, while a crackdown on graft now in its second year is making it harder for wealthy Chinese to take money out of the country and discouraging conspicuous consumption. Visitors from China were down 30% to 871,000 in the first half of 2014, according to Singapore's tourism board.

Takeaway: Whether they are or are not buying the business, we believe Genting's VIP business remains in better shape than MBS's.

CWN:AU – James Packer announced London banker Robert Rankin, currently Deutsche Bank’s co-head of corporate banking and securities and head of corporate finance, will become co-chairman of the publicly-listed Crown Resorts and chief executive of Mr Packer’s private investment company, Consolidated Press Holdings.

MCP:PM & MPEL – Melco Crown Resorts Corp (Philippines), which in December will soft open City of Dreams Manila, hired nearly 2,200 workers in the third quarter of 2014. The increase in pre-opening costs was mainly attributable to increase in staff costs by PHP1.3 billion, “which was in line with the increase in headcount,” said Melco Crown Philippines.

Takeaway: Labor costs will be scrutinized once the property soft opens in December

PENN & GLPI – Judge Eliza Ovrom ruled Friday the Iowa Racing and Gaming Commission acted within its authority when it granted a state gaming license to the Hard Rock Hotel & Casino Sioux City. In her 25-page ruling Friday, Ovrom dismissed all of Belle's claims, saying the company failed to prove the IRGC made errors or abused its broad discretionary powers to regulate legalized gaming in the state.

Takeaway: While this would appear to be the end of the judicial process, something tells me PENN is not finished appealing their case.

H – announced it acquired its partners’ 92% interest in the 491-room Hyatt Regency Lost Pines Resort and Spa in Austin/Bastrop, Texas, for approximately $143 million. The Company also assumed approximately $65 million of property-level debt. The total price, inclusive of debt, implies a valuation of approximately $450,000 per key. The transaction closed on November 6.

Takeaway: Would appear a fair price, We believe near 14x EBITDA, given hotel's quoted ADRs of $260-$380/night and 491 guest rooms, more than 60,000 square feet of indoor meeting space and over 240,000 square feet of outdoor function space with pavilions and an amphitheater.

Insider Transactions:

BEE – CFO Diane M. Morefield sold 100,000 shares of the company’s stock on Friday, November 7 at an average price of $12.59 and now directly owns 83,074 shares.

BEE – COO Richard J. Moreau sold 76,424 shares of the company's stock on Thursday, November 6 at an average price of $12.64 and now directly owns 125,866 shares.

Takeaway: Despite telling us and other shareholders their equity is undervalued during meeting at NAREIT, insiders are selling.

HT– President Neil Shah sold 500,000 shares of stock on November 6 and 7, at at an average price of $7.34 and now directly owns 1,988,742 shares.

LVS – EVP Ira H. Raphaelson sold 8,815 shares of the stock on Monday, November 3 at an average price of $62.35 and now directly owns 12,185 shares

Takeaway: It’s purely a tax sale. Shares sold to pay taxes in connection with the vesting of restricted stock units (21k shares) granted under the Issuer's 2004 Equity Award Plan

INDUSTRY NEWS

Japan Tables Gaming Legislation – Japan’s ruling Liberal Democratic Party dropped plans to pass a bill to legalize the principle of casinos in the country in the current parliamentary session. The decision was mainly due to lack of time for deliberation as the current session of the Diet ends on November 30 due in also in part to the resignation of two Cabinet ministers in October.

Macau International Airport Traffic – handled over 460,000 passengers in October, +12% YoY. The growth in airport passengers in October was partly boosted by the traffic brought by China’s National Day holiday in the first week of the month, for which CAM noted that the airport handled a total of 74,000 passengers from October 1-5, an increase of 17% compared to the same period last year. Macau International Airport Co Ltd says the number of takeoffs and landings the airport handled also rose by 12%, to about 4,600.

Cyprus Set to Submit Casino Legislation – A draft law that seeks to open Cyprus’ first integrated casino resort is due to be submitted to the Cabinet before the end of November. Minister of Energy George Lakkotrypis confirmed that a discussion launched last month with political parties and government bodies over the creation of a casino has been completed. The main casino is required to house at least 500 rooms, 100 gaming tables and 1,000 slot machines, and the operator will be able to select the district to build the resort. The annual fee to the state is €2.5m for the first four years, increasing to €5m for years four to eight, after which the rate may be reviewed by the Cyprus Gaming and Casino Supervision Authority. In addition, the operator will be taxed a further 15pc of gross gaming revenue every month.

Takeaway: Could Spirit Airlines move to increase service to Atlantic City with United Airlines departure?

Revel's $32 Million Real Estate Tax Bill – Judge Gloria Burns ruled Atlantic City could pursue a $32 million unpaid 2014 tax debt. The most likely manner for it to be paid is when Toronto-based Brookfield Asset Management completes its $110 million purchase of the casino from bankruptcy court. City Attorney Jason Holt said a portion of the proceeds from the sale would be set aside in an escrow account to settle the tax debt. If the deal does not close before early December, the city could sell a tax sale certificate, in which an investor in effect buys a lien against the property and pays the taxes due on it. The investor gets paid when the property owner pays off the tax debt; if that doesn't happen, the investor can foreclose in two years.

Takeaway: The true cost of ownership is quickly rising beyond the $110 million purchase price.

Mohegan Sun Considers Expansion – Kevin Brown, Chairman of the Mohegan Tribal Council, the tribal management board that oversees the Mohegan Sun Casino in Montville said he welcomes an overture made by the Deputy Speaker of the Connecticut House of Representatives about expanding casino gaming operations in Connecticut. While Brown said it would be premature to identify any sites that the Mohegan Tribal Council might be interested in considering, he acknowledged that with one of the three casino gaming locations in Massachusetts being built in Springfield, it would make sense to consider a location in the northern part of Connecticut.

Takeaway: Increased competition and further cannibalization - when will gaming operators learn more boxes isn't the answer?

Port of Vancouver – Port Metro Vancouver’s 2014 Alaska cruise season ended in October with strong numbers on par with the 2013 season. The 2014 season saw 812,095 passengers on 243 calls by 29 cruise ships. In Vancouver, the cruise business generates approximately 283,000 hotel night stays, and over 440,000 in British Columbia, generating some 6,000 direct and indirect jobs. Predictions for the 2015 cruise season estimate ship call and passenger numbers to be similar to 2014.

Takeaway: Alaska has made a nice recovery after a subpar start to 2014 summer. Early indications show 2015 Alaskan business should grow as well.

MACRO

China Economic Data

Trade balance $45.41B vs $42.5B consensus and $31B in September

Exports +11.6% y/y vs +10.5% consensus and +15.3% in September

Imports +4.6% y/y vs +5.0% consensus and +7.0% in September

CPI +1.6% y/y vs +1.6% consensus and +1.8% in September

PPI (2.2%) y/y vs (2.0%) consensus and (1.8%) in September

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway: We're seeing bottoms up slowing in Europe cruise pricing in our monthly survey. Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis.

Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is decidedly less positive.

Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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